13-9: Replacement Analysis Problem 13-10 Replacement Analysis St. Johns River Sh

Question

13-9: Replacement Analysis

Problem 13-10
Replacement Analysis

St. Johns River Shipyard's welding machine is 15 years old, fully depreciated, and has no salvage value. However, even though it is old, it is still functional as originally designed and can be used for quite a while longer. The new welder will cost $83,000 and have an estimated life of 8 years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before depreciation from $25,000 to $50,000 per year. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 40%, and the firm's WACC is 10%. Should the old welder be replaced by the new one?

Old welder -Select-shouldshould notItem 1 be replaced.

What is the NPV of the project? Round your answer to the nearest cent.
$  

Explanation / Answer

Tax rate 40% Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Year-8 Additional Revenue                25,000          25,000                  25,000           25,000                  25,000           25,000           25,000      25,000 Less: Fixed Cost Less: Depreciation as per table given below                16,600          26,560                  15,936              9,562                    9,562              4,781                -   Profit before tax                  8,400          (1,560)                    9,064           15,438                  15,438           20,219           25,000      25,000 Tax                  3,360             (624)                    3,626              6,175                    6,175              8,088           10,000      10,000 Profit After Tax                  5,040             (936)                    5,438              9,263                    9,263           12,132           15,000      15,000 Add Depreciation                16,600          26,560                  15,936              9,562                    9,562              4,781                     -                  -   Cash Profit After tax                21,640          25,624                  21,374           18,825                  18,825           16,912           15,000      15,000 Depreciation Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Total Cost                83,000          83,000                  83,000           83,000                  83,000           83,000 Dep Rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% Deprecaition                16,600          26,560                  15,936              9,562                    9,562              4,781           83,000         Calculation of NPV Year Captial Operating cash Annual Cash flow PV factor @ 10% Present values 0              (83,000)               (83,000) 1.000               (83,000) 1          21,640                  21,640 0.909                  19,673 2          25,624                  25,624 0.826                  21,177 3          21,374                  21,374 0.751                  16,059 4          18,825                  18,825 0.683                  12,857 5          18,825                  18,825 0.621                  11,689 6          16,912                  16,912 0.564                    9,547 7          15,000                  15,000 0.513                    7,697 8          15,000                  15,000 0.467                    6,998 Net Present Value                  (1,545) Since NPV of replacement is negative, we should continue with existing machine only

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